Daily Insight
Group Economics Macro & Financial Markets Research
23 June 2016
Fed’s Yellen: US recession not most likely impact from Brexit Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
Maritza Cabezas Senior Economist
UK Referendum - Only hours away from UK voters deciding on the referendum, all attention is focused on the final day of campaigning and market developments. Investors remain more optimistic about a victory of the “remain” campaign. Equity markets are firm, sterling has maintained recent gains, the robust demand for UK government bonds is more nuanced, while lower safe haven demand has weighed on gold prices. However, polls continue to say that the race is too close to call. This and the low liquidity in sterling options market have kept the FX options market in a panic state. Meanwhile, betting markets are seeing the implied probability of a “remain” vote at 76%, jumping from a low of just 58% a week earlier. Our base case is that the UK will opt to remain in the EU. (Maritza Cabezas)
Tel: +31 20 343 5618 maritza.cabezas@nl.abnamro.com
Chair Yellen’s Testimony - The backdrop of the Brexit debate means investors were less focused on Chair Yellen’s semi-annual testimony to US Congress and before the House Financial Services Committee. The message she conveyed was not that different from the press conference she held after the FOMC meeting last week. However, getting all her views in one go, made the tone of the testimony seem more dovish than her previous communication. Her main message was that “considerable uncertainty” about the economic outlook warranted a cautious and gradual approach to raising interest rates. The weak pace of investment and the latest readings of the jobs market illustrate that domestic demand might falter. She mentioned that vulnerabilities in the global economy remain, including China and the UK referendum. Yellen reiterated that a UK vote to exit the EU could have significant economic repercussions. Answering one of the questions she mentioned that a 'US recession was not the most likely impact from Brexit'. We think that Chair Yellen’s more cautious tone is in line with our view that rates will remain on hold this year. (Maritza Cabezas) Credit - In its latest tool to push inflation towards its 2% goal, the ECB kicked off on Wednesday its latest monetary tool, the TLTRO II, the allotment of which will be published this Friday. The game plan, first announced in March, aims to encourage eurozone banks to borrow money from the ECB. The amount that can be borrowed is dependent on the size of a eurozone bank's loan portfolio. The rate that would be charged by the ECB for the loan is currently zero. However, there is a twist in the tail with TLTRO II. If a bank increases its lending to the economy by January 2018, then the ECB could actually pay the bank for the privilege of giving them money, at present at a rate of 0.4%. This weapon from the ECB will partly be used by banks to pay off older TLTRO I loans, of which they had to pay a charge (between 0.05% and 0.15%). The roll-over of old loan contracts to these new TLTRO II contracts could cost the ECB up to EUR 662mn, based on a sample of 50 of the largest banks in Europe. Even after the old contracts have been rolled, we still predict that banks will borrow a further EUR 100-200bn, pumping further liquidity into Europe. (Tomas Kinmonth)
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Daily Insight - Fed’s Yellen: US recession not most likely impact from Brexit - 23 June 2016
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Daily Insight - Fed’s Yellen: US recession not most likely impact from Brexit - 23 June 2016